The Farm CPA

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

You Can Pick & Choose on Bonus Depreciation!

Jan 20, 2011

We had a reader ask the following question:

"I'm thinking of putting up a farm shop and storage building this year (2011). Can I take the bonus depreciation on only half of the cost of the building and depreciate the remaining amount over the 20 year period?"

Now based on my heading, you are probably assuming that this farmer can do this. The answer, however, is no. On all assets of the same asset type and class such as all new farm buildings put in service during the year, you must either take 100% bonus depreciation on ALL assets in this class type OR elect to take normal depreciation on all of the assets in that class.

However, the option that you can choose is to take bonus depreciation on one type of assets such as farm buildings and elect not to take it on another class such as farm equipment. by making this election, you can more optimize your farm taxable income to reflect your best planning opportunities.

Here is an example of how this might work. Let say the farmer puts in a new farm shop that costs $250,000 and buys new farm equipment that costs $300,000. The farm normally makes about $350,000 from operations after other depreciation. The farmer knows that if they take the full bonus depreciation on both assets, then the taxable income for the year will be a loss of around $150,000. The farmer does not want to show that much loss, so they make the election to only take bonus depreciation on the farm shop of $250,000 and depreciate the farm equipment over 7 years. This gets their net farm income down to about $50,000 which might be more preferable to them.

You have several options on how you take the bonus depreciation and remember that farm equipment is still available for the Section 179 deduction, so even if you elect out of bonus depreciation, you still may be able to optimize your farm income by using Section 179.

My normal preference would be to take bonus depreciation on all 20 year property such as farm buildings in 2011 since you can get an immediate deduction for these assets, however, every farm situation is different, so you must review this with your tax advisor.